Unions and Airlines

This article explores the effects that pilot unionization has on the
U.S. airline industry. During 2008, the author flew 50-seat regional
jets for a subsidiary of a major airline.

Why airlines tend to be unionized

In a country where the Bureau of Labor Statistics says that only 7
percent of private industry workers are unionized (source), how
is it possible that nearly every U.S. airline operates with unionized
pilots?

The explanation lies in the interaction of labor laws and aviation
regulations. Let's consider labor laws first. The law compels a
company to negotiate with a labor union. If it cannot reach an
agreement, however, and the union goes out on strike, the company is
able to hire replacement workers and continue its operations.

Federal aviation regulations, on the other hand, require an airline to
operate with pilots who have specific training for and experience at
that airline. Suppose an airline operates Boeing 737s, for example,
and its pilots go out on strike. You might think that the airline
could operate legally and safely by hiring trained Boeing 737 pilots
from some airline. However, the FAA will not allow this because those
replacement pilots, though competent with the airplane, do not have
experience with the specific operating rules of the airline whose
pilots are out on strike.

An airline whose pilots go out on strike is therefore shut down. This
makes the rewards to pilot unionization at an airline much greater
than the rewards to unionizing a group of manufacturing workers, for
example.

A competent pilot union negotiator will present the airline with a
plan to transfer essentially all expected future profits into the
paychecks of pilots. It does not make sense to accept less because the
pilots always have the power to strike and shut the airline down. The
only real point of discussion would concern the best estimate of what
the airline's profits are likely to be during the term of the contract.

During periods of economic growth, the negotiators peering in the
future will tend to see a picture of increasing profits and therefore
the airline will agree to substantial pay and benefits increases for
the pilots. Should the economy turn down during the contract period,
the pilots, having expected to collect 95 percent of the airline's
profits, will in fact be entitled to 115 percent of the airline's
profits. As the airlines tend to operate with fairly small reserves,
paying out 115 percent of profits results in the airline seeking
Chapter 11 bankruptcy protection and a federal judge adjusts the pilot
union contract so that the pilots are back to collecting 95 percent of
the new estimated profit figure.

This cycle of union contract negotiation and Chapter 11 bankruptcy is
one reason that the airlines lease rather than own airplanes. By
having the main assets in the hands of third parties, it turns out to
be a reasonably efficient way of allocating airline profits. The
stakeholders who suffer the most are public equity shareholders (the
"widows and orphans"), who get wiped out with every bankruptcy
filing. The leasing companies get paid, the airline executives get
paid, the unionized workers get paid as much as possible, lawyers and
Wall Street banks get fees from every bankruptcy, and the public
shareholders get 5 cents back for each dollar that they invested.

Why some pilots earn $16,000 per year

All jet pilots are held to the same stick-and-rudder standards of the
FAA Airline Transport Pilot practical test (see faa.gov). A
70-seat jet presents the same flying challenge as a 150-seat jet. The
captain and first officer trade "pilot flying" and "pilot monitoring"
roles on each leg of a trip. When the actual jobs are so similar, how
is it possible that some airline pilots earn $16,000 per year and
others earn close to $300,000? The captains, of course, do have more
experience and that experience has value to the employer, which is why
non-unionized air carriers may establish a 2:1 or 3:1 difference in
pay between their most senior and most junior pilots. But how can we
explain a 19:1 pay differential for workers with similar training and
tasks?

The answer is to look at who controls the pilot's union: very senior
pilots. The airline management is mostly interested in what percentage
of its revenues are paid out to pilots; the distribution of the money
among the pilots does not affect profitability. The very senior pilots
on the other side of the table say "We need the most senior pilots to
get $300,000 in pay and benefits." The airline's response is "The only
way that could work is if we pay the new pilots $16,000 per year." The
group of senior pilots responds "We can live with that."

Note that being classified as "junior" or "senior" has nothing to do
with flying skills or experience. If Captain Sully were to start work
today at a regional airline, he would earn between $16,000 and $20,000
per year, depending on the carrier, and fly as first officer. He was
"senior" at US Airways, but is "junior" at the new carrier.

[Note: the author was on track to earn approximately $19,000 per year,
but was furloughed during the Collapse of 2008.]

Why some flight crews are fatigued

After the pay discussion is concluded, the union negotiation will turn
to schedule. Keep in mind that pilots are paid by the hour and only
for those hours when the airplane is "off the gate". I.e., if there is
a three-hour wait in the airport between legs, the pilot is not paid
for that time. The senior pilots may say "We need senior pilots to
work no more than 10 days per month, about 8 hours per day, with all
of the flying neatly compressed so that there is almost no waiting
time." The airline representatives say "The only way that can work is
if the junior pilots work 22 days per month and nearly 16 hours per
day." The senior pilots negotiating for the union respond "We can live
with that."

Scheduling at a typical unionized airline is done in order of
seniority, with the senior captains and first officers picking the
best routes first. The most junior pilots and newly upgraded captains
are "on reserve" and have no idea where or when they'll be flying.

How does this affect safety? As a passenger, you might get on a plane
with a senior crew. Your pilots have slept a full 8 hours every night
for the last week and are fresh from spending a four-day weekend with
their families. The captain has been with the airline for 20
years. The first officer has been flying this type of airplane for 10
years and could do the entire flight by him or herself if
necessary.

Alternatively, you might get onto a plane with a junior crew. Your
pilots are exhausted from being on the last day of a four-day
trip. Each night they've gotten a 9-11-hour "rest period", but that
includes waiting for a shuttle to the hotel, riding the shuttle to and
from the hotel, showering, eating, and possibly trying to sleep at an
unusual hour. Perhaps they've slept 5 hours each night. The first
officer joined the airline a few months ago. He or she has some
simulator training, but is struggling to stay ahead, mentally, of the
airplane. The captain knows how to fly the airplane, but he or she was
just upgraded to captain and has no idea how to manage a first
officer, particularly one who might make a lot of mistakes. Until a
few months ago, the captain of this flight was a very senior first
officer and all of his or her flying was with very senior
captains.

From the point of view of safety, common sense would argue against
pairing up a company's least experienced pilots with the company's
least experienced captains and then driving them both to exhaustion. But
that's how nearly all unionized U.S. airlines do it.

[Note: there are exceptions to this rule. Warren Buffett's NetJets
private jet service, for example, gives all pilots the same schedule
of one week on, one week off.]

Union agreements lead to long pilot commutes

Captain Sully lived in the exurbs of San Francisco and commuted to his
home base of Charlotte, North Carolina where he started the trip that
ended with a landing on the Hudson River. I.e., before Captain Sully
welcomed passengers and took the controls of the Airbus A320 he had
endured a coast-to-coast flight in the back of an airliner. Consider
your own state of alertness and fatigue at the end of a coast-to-coast
flight. Do you feel ready to start a full work day?

Why couldn't Captain Sully have switched to United Airlines, which has
a base in San Francisco, and let a United pilot living in North
Carolina takes his US Airways job? By swapping jobs like that, both
would have started on the bottom seniority rung at their respective
new airlines. Despite the fact that their skills and experience hadn't
changed, they'd suffer at least a 50 percent hourly pay rate cut and,
because they'd be on reserve for several years, their effective rate
of pay per hour at work would be only about 25 percent of their former
pay.

If airlines paid workers according to personal experience and skill
rather than seniority within their particular airline, pilots would be
more likely to live near where they worked. This would have a positive
effect on safety since flight crews would tend to be better rested.

Seniority-based pay leads to industry instability

Earlier in this article I addressed the near-guaranteed cycle of
union-negotiated pay raises and Chapter 11 bankruptcy. This was a
result of the pilot union seeking to extract 100 percent of an
airline's profits. There is another aspect of seniority-based pay that
leads to industry instability that is independent of the percentage of
revenue paid to pilots.

Consider two regional airlines where new pilots earn $20,000 per year
and pilots who've been with the airline for 20 years earn $80,000 per
year. Airline A and Airline B fly the same types of planes, have
exactly the same cost structure, and have the same percentage of
junior versus senior pilots. Suppose now that a fluctuation in demand
causes Airline A to have slightly fewer customers and Airline B to
have slightly more customers. Airline A will have to furlough a few
pilots and Airline B will hire a few.

Airline A would naturally like to furlough its most senior pilots, the
ones costing $80,000 per year, or perhaps cut all pilots' monthly
hours slightly. Union agreements, however, force it to furlough the
most junior pilots. Airline A is thus left with a pilot group that, on
average, has more years with the airline than before and therefore has
a higher average cost. Airline B, by contrast, just hired a bunch of
new pilots and is paying them just $20,000 per year. This means that
Airline B's average cost for a pilot is lower than before. Airline B
can now move into Airline A's region and offer lower fares. Customers
start choosing Airline B over Airline A and the furloughing and hiring
intensify.

Union agreements add positive
feedback to an already unstable industry. An airline that is
successful and growing will enjoy lower costs because of the new
pilots being hired for almost nothing. An airline that is shrinking
will see its labor costs spike as nearly all flights are operated by
highly paid senior crews.

The start-up airline advantage

Union agreements and seniority-based pay give a huge advantage to a
startup airline, such as JetBlue. Suppose that a new airline offers
the exact same payscale as established airlines, including lavish pay
for those who've been with the company for 20 years. As none of its
employees will have 20 years of seniority, this promise is of no
consequence initially. All pilots in the first year of operation are,
by definition, on the Year 1 payscale. If the airline grows rapidly,
even after 10 years, the average pilot may be on 3rd year pay. A
legacy carrier with the same payscale will face enormously higher
costs because its average employee is on 20th year pay.

Eventually the growth flattens out, the startup airline ages, and the
average years of employment with the company is similar to that of
pilots at other airlines. See above for how the airline will then be
unable to compete and it will be time for a trip through Chapter 11,
thus wiping out the shareholders. As this cycle is inevitable, the
airframe manufacturers prepare for it by offering assistance and
favorable terms to new carriers, e.g., see this page
from Boeing.

How does Southwest survive and prosper? Since they are constantly
growing they don't have as high a percentage of senior pilots as their
competitors. Also, their union may be taking a longer/smarter/more
realistic view about maximizing its compensation. A union does have an
incentive to avoid bankrupting an airline: if the airline goes Chapter
7 (liquidation) rather than Chapter 11 (reorganization), the senior
pilots may have to start over at another airline at 1/10th of their
former hourly compensation. Note that Southwest would be in a lot of
trouble if the air travel market were open to international
competition. Ireland's Ryanair has costs that are 25 percent lower,
but, fortunately for Southwest and unfortunately for American
consumers, is prevented by government regulations from doing business
within the U.S.

Conclusion

The interaction between labor laws and FAA regulations results in
pilot unions having a strong claim on 100 percent of an airline's
profits. An investor in a unionized U.S. airline should not expect to
see a return on that investment and, indeed, should expect an eventual
Chapter 11 bankruptcy filing to wipe out his or her investment
altogether.

The fact that an airline must pay its more senior workers so much more
than its junior workers leads to further risk for investors. An
airline whose business is slightly down will face increased labor
costs precisely at the time that it needs to cut its costs in order to
survive.

Union agreements and seniority-based schedule assignments lead to
reduced safety for passengers, as the least experienced workers are
pushed the hardest and get the least amount of rest. Despite the
sometimes exhausted crews, the airline industry remains safe due to
the disciplined use of checklists and the fact that two pilots are
employed to do a job that, in the absence of a serious equipment
failure (very rare), could be done by one person.

In the absence of protectionist regulations, which prohibit foreign
carriers from carrying domestic passengers, we would expect the entire
U.S. air travel market to be captured by airlines owned by countries
where labor laws do not facilitate the unionization of pilots. Without
barriers to competition we would expect to see something like the
cruise ship industry, where foreign-flagged vessels dominate. An
airline might be based in the Philippines, for example, or El Salvador
(like the excellent TACA, which has
its
own history with ALPA), and serve the U.S. with foreign-based crews.

Regardless of whether the U.S. is able to maintain its trade barriers,
a sustainable long-term structure would be a pilot-owned airline. If
the pilots are the owners there need be no conflict concerning
distributing profits.

About the Author

The author is a member of the Air Line Pilot's Association (ALPA) and holds FAA Airline Transport
Pilot and Flight Instructor certificates for both airplanes and
helicopters. The author is type-rated in the Canadair Regional Jet and
Cessna Citation Mustang and has more than 3500 hours of flying
experience (more).
Text and photos (if any) Copyright 2010 Philip
Greenspun.
philg@mit.edu

Reader's Comments

One thing that is not quite so clear. It seems it is not in the interests of a senior pilot to not make it easy for him to switch to a better offer at a different airline. Sullenberger, for example, should want the freedom to change to United and, after being trained on their procedures, be a senior pilot there. Neither he nor US Air are interested in him doing that huge commute. So why don't the senior pilots seek "free agent" status for themselves?

This appears to explain very well how Southwest and Alaska airlines have grown so well: If you can just keep growing, and never once falter, then it's a positive-feedback cycle. As long as you never contract, you can keep growing cheaper than the competition by hiring new people, thus "liquidating" their seniority at their previous employers.

This is wild! If I were to go into the cement-mixing business, for example, and crowd out the incumbent competitor, that would be wasteful. They already have the experienced people, the trucks and equipment that are mostly paid off, etc. So it would be more profitable to just invest in that company but otherwise leave it alone.

But not with the airlines. When Airline A out-prices and takes a piece of business from Airline B, they wind up with LOWER costs than Airline B had. It's all about finding ways to churn the people from one airline to another, because each time that happens, money comes out of them!

This helps explain, to me, why people ever feel like investing in airlines at all. If one can just out-borrow, out-invest and out-grow the OTHER guy, he wins because the effective COST, over time, of acquiring that new business is negative... so long as you never run out of liquidity and no one else (Southwest?) does it better or faster. Wild.

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I also see a killer meta-opportunity here. There must be SOME kind of "deal of the century" in this situation that effectively "metabolizes" the inefficiencies that you so clearly explained here.

I'm not sure what that deal-of-the-century might be, but here are a few guesses:

o An airline successfully opting out of the union system altogether, maybe with a "suicide clause" in its charter that programs its self-destruction if it ever signs a union contract. Thus, all starting pilots make 2X what they would at a union airline, but ultimately 0.5X when they reach seniority?

o Setting up nice airports along the borders of Mexico and Canada, and matching Mexican/Canadian airlines to fly between US cites, but making these required-by-labor-law short hops over the border?

o Some kind of just-in-time airline with no employees at all, but instead hourly independent contractors that sign big computer-generated contracts for each and every flight?

It also breaks my heart to think of how the senior and junior pilots, helping to fly the same plane, have to do so in spite of their having, essentially, and adversarial relationship.

The senior pilot is a parasite on the junior, they both know it, they swallow that and do their jobs, and that sucks. I also trust their partnership with my life when I fly.

What this also suggests, to me, is that flying a jetliner actually isn't that hard. Driving a taxi in Manhattan sounds more challenging. I mean, it apparently costs basically NOTHING ($19,000/year) to pay someone to just FLY A JETLINER. That's free. They make the REAL money by running a (legally-protected) protection racket, gate-keeping between the airlines and their ability to do business. They could do THAT from home; flying the airplane is just a formality.

My guess? Because making it easier for them to leave for a competitor is tantamount to making it easier to bring in other pilots to your own airline.

Besides, no other airline is going to bring in a senior pilot when they can hire a junior pilot to do the same work. The whole concept of senior pilots exists only as a means for *current* employees to extract rents from the airline.

Although jointly, senior pilots would benefit from the ability to trade airlines, a United senior pilot does not benefit from the ability of Delta pilots to join at a higher seniority level and vice versa. To negotiate these kind of reciprocal powers, they would need to form a cross-airline union, but that organization is much less effective at protecting the interests of its (senior) pilots for reasons explained above.

In addition to what other have posted about switching company-to-company, it would put a burden on the Air Carrier itself to create a happy/beneficial work environment for the majority of its employees so that people didnt leave. People leaving means the company will have increased training costs, and lower return on their investment in the individual pilot. With this burden resting on the company's shoulders it largely removes the necessity for a union to negotiate a collective bargaining agreement. The company will be forced to treat each employee as an individual with variable amounts of value instead of being a commodity that rises and falls with the market value. "Good" employees would need to be rewarded so that they didnt leave the company, while "bad" employees would be shown the door.

A collective bargaining agreement is not always a limit to how little a a pilot can be paid, it is also a limit on how much they can be paid. The negotiated payrate cannot be exceeded, because that would be a violation of the contract.

The solution sounds simple, just start a non-union airline and treat the employees right! But without a wide network of companies to move between(ie: switching from Company A to B while retaining pay/benefits) this wont work.

There are numerous points in your article I would disagree with. The most important is that you vastly overestimate the power the Unions really have. It is not unusual for the Airline to drag negotiations on for many years past the amendable date of a Contract, during which time the Pilots must keep working, they cannot strike until released by the NLRB. Getting the the NLRB to release a union to strike takes years, which benefits the Airline by keeping the Pilots working under the old Contract for as many as 5 or 6 additional years.

Also, when you say that " . . some airlines pay Pilots $300K while paying junior Pilots $19K" you are really mixing the top and bottom scales from two totally different types of Airlines. The senior Pilots at Regionals aren't making $300K, more like $100K, which makes the pay differential much lower. At a Major airline, the difference is more like $45K first year pay to $250K after 12 years.

Your article mistakenly claims that Senior Pilots are part of the reason that Junior Pilots' pay is lower. The reality is this- Senior Pilots, by definition, make up a small portion of the Pilot Group, the junior Pilots make up the majority of the vote. Additionally, the Pilots who are negotiating contracts are not necessarily the Senior Pilots. At my airline, and at several other Majors, the Negotiators are often Junior Captains and First Officers. They are negotiating for Junior First Officers, "Senior" First Officers, Junior Captains, and Senior Captains. All Contracts have to be approved by a majority of the Pilots; Senior Pilots make up the the smallest percentage of any Pilot Group, so they are not in control of what passes. Often, Contracts are passed with improvements for junior pilots that outstrip the improvements for senior pilots. I have seen this happen, and if you are in this Industry a little longer, you will, too.

The real reason that Pilots at the Regionals are paid less than Major airline Pilots is that:

A) They carry less passengers (hence produce less revenue) and,

B) They are willing to work for less money in the hopes of getting experience to move on to a better-paying airline.

C) The Regionals are also able to pay less because they can cast a wider net for applicants, due to lower requirements. Many major airlines,including the one I work for, require previous experience as a Captain at a Regional (or military PIC experience), whereas during the last hiring boom at the Regionals, pilots were hired with the bare FAA minimums.

When the UAW strikes, the auto manufacturer(s) shut down, but still have all the capital and other fixed costs to support. When baseball players strike, the league shuts down, but somebody is still paying for the stadium upkeep, front office salaries, etc. When Boeing goes on strike there are no 'replacement workers' who come in and man the factories, and management still gets paid and the buildings must still be maintained and paid for. Your assumption that the pilots shutting down an airline gives them unsurpassed power (enough to extract 115% of profits) does not hold true in any other industry, so I challenge the premise.

Do pilots have a lot of power? You bet. What happens when the aviation maintenance facility workers go out on strike? The SAME THING; the industry stalls. Likewise the machinists at Deere, or the Writers Guild for TV production companies. And yet the writers don't control the industry, nor the machinists at Deere. Perhaps your entire argument rests on a faulty supposition.

(No connection to the airline industry; not a pilot, maintenance or other worker.)